The city of Las Vegas' fiscal 2013 budget was the first in three years that didn't trim spending.(Photo: Joe Cavaretta, AP file)
Wracked by the recession, state governments overall are starting 2013 in their best financial shape in several years.
a result, states' improving health could help cushion any blow to the
economy from tax hikes and likely federal spending cutbacks this year,
"The worst of (the recession-related problems) are
behind us," says Don Boyd, senior fellow at the Rockefeller Institute
of Government, which studies state fiscal issues.
Local governments still face stiff budget challenges, but their overall condition appears less dire.
government spending will largely be unchanged in 2013 after four
straight years of declines, says Michael Pagano, dean of the College of
Urban Planning and Public Affairs at the University of Illinois-Chicago.
Municipal revenue continued to fall during the 3-year-old economic
recovery because cities and counties depend heavily on property taxes,
which were hammered by sharp declines in home values after the real
But home values have stabilized and started rising in
most places. Local sales tax and income tax revenue is increasing as
job growth and consumer spending pick up.
The city of Las
Vegas' fiscal 2013 budget was the first in three years that didn't trim
spending. The city, which was pummeled by the housing bust and saw its
unemployment rate hit 15.6%, beefed up after-school programs and
restored weekend cleanup for city parks. The city credits a rebound in
tourism and fiscal austerity in the downturn.
rely mostly on growing income tax and sales tax revenue, boosted
spending modestly for the third straight year in fiscal 2013, which
began in July. General-fund spending is up 2.2% after rising 3.4% in
fiscal 2012, says Brian Sigritz of the National Association of State
After eliminating 653,000 jobs from 2008
through 2011, state and local governments kept payrolls roughly stable
in 2012, and Moody's expects them to add 220,000 jobs in 2013.
and Pagano caution that states and localities still face challenges
that will limit growth, such as rising worker pension costs and falling
But in effect, states and localities are
switching roles with the federal government, whose spending insulated
the economy from a worse fate in the recession.
In 2012, for
example, public-sector spending cuts pared economic growth by 1
percentage point, says Mark Zandi, chief economist of Moody's Analytics.
Most of that - 0.7 percentage points - came from federal reductions
agreed to last year, Zandi says. The other 0.3 point was from state and
local governments, with cities and counties accounting for two-thirds.
2013, public-sector cuts won't be much bigger. They'll slice economic
growth by 1.2 percentage point - all from the federal government -
according to Moody's. States and localities will have a neutral effect
on growth, with states adding a bit and cities and counties subtracting
far less than they did in previous years.
"The fiscal headwinds will be blowing hard in 2013," Zandi says. "But it isn't too much different" than 2012.